Ooh, this is ugly.
The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)
While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated. If they got kickbacks, um, commissions, they are culpable and thus liable.
As we have stated repeatedly, servicers lose tons of money on portfolios with a high level of delinquencies and defaults. The example of Fairbanks, a standalone servicer who subprime portfolio got in trouble in 2002, is that servicers who are losing money start abusing customers and investors to restore profits. Fairbanks charged customers for force placed insurance and as part of its consent decree, paid large fines and fired its CEO (who was also fined).
Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality. Here’s some background courtesy Barry Ritholtz:
When a homeowner fails to keep up their insurance premiums on a mortgaged residence, their loan servicer has the option/obligation to step in to buy a comparable insurance policy on the loan holder’s behalf, to ensure the mortgaged property remains fully insured….
Consider one case found by [American Banker’s Jeff] Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy – one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.
That $33,000 policy — including the $7,100 kickback – is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.
Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.
And the worst of this is….the insurance is often reinsured by the bank/servicer, which basically means the insurance is completely phony. The servicer will never put in a claim to trigger payment. As Felix Salmon noted,
This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.
Note there are variants of this scheme where insurance is charged to the borrower (I’ve been told of insurance being foisted on borrowers that amounts to unconsented-to default insurance, again with the bank as insurer; this has been anecdotal with insufficient documentation, but I’ve heard enough independent accounts to make me pretty certain it was real)
One reason I am predisposed toward taking this at face value is I have been hearing widespread complaints from readers about forced place insurance. And the industry experts I consulted with thought BofA was a likely candidate since it already owned a large insurer. The narrative from BankofAmericaSucks is a bit wobbly on the roles of some of the parties:
Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance (aka Lender Placed Insurance, FOH, LPI, etc). What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC, Aurora Loan Services [a subsidiary of Lehman Bros Holdings], IndyMac Federal Bank [a subsidiary of OneWest Bank], Saxon, HSBC, PennyMac [a collection agency started by former Countrywide Home Loans executive Stan Kurland after CHL and Balboa were sold to BAC], Downey Savings and Loans, Financial Freedom, Select Portfolio Services, Wells Fargo/Wachovia, and the now former owners of Balboa Insurance themselves…Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.
Yves here. Um, he names a long list of servicers, not lienholders, but we’ll continue.
Balboa makes some money by charging these companies to track your insurance (the payment of which is factored into your loan). If you do not meet the minimum insurance requirements set by your lienholder, Balboa Insurance places a force placed insurance policy on your loan. You are sent a letter telling you that you do not have insurance, and your escrow account is then adjusted for the inflated premium of a full coverage policy placed by Balboa’s insurance tracking group, run by Steven Ramsthel, Sr Vice President of Loan Tracking Operations & Customer Care at Balboa Insurance Group….
The release also alleges that regulators were complicit (click to enlarge):
And if these allegations are indeed accurate, they make a mockery of the settlement charade underway among 50 state attorneys general, Federal regulators, and what amount to banking industry crooks, aka servicers.
The writing style of the author (some typos, not that yours truly is one to make much of that sort of thing) and the errors regarding the roles of key parties will lead to questions regarding validity. But as indicated, previous abuses in this area, the past behavior of underwater servicers, and the complaints I have been hearing make this all too credible.